While mass subprime loan defaults would have been enough to create major balance sheet stress for selected U.S. banks (they have), what's becoming increasingly clear as the crisis enters its second year is that the bad debt and problematic lending was far from limited to the subprime sector. Economist Richard Felson said RGE Monitor founder Nouriel Roubini's forecast -- once viewed as extreme -- that a series of leverage bubbles would be unwound, across sectors, globally, "is proving to be accurate."

Global pattern: inappropriate lending

"It's becoming increasingly clear that the practice of inappropriate lending and excessive debt and leverage occurred throughout the world, principally in the U.S. and Europe, but also involving Japan, and major emerging market economies," Felson said. "The most problematic part of the inappropriate lending is that in addition to helping create the global financial crisis, the lending did little to increase the world's productive capacity, and the U.S.'s productive capacity is a classic example of that."

The inappropriate lending did, however, in many cases, generate large fees for the dealmakers, Felson said. "In many cases, it was reckless lending and dealmaking for fees. Dealmakers made these deals in many instances knowing full well the only positive to come out of it was their fee."

Felson cited the following examples of inappropriate lending:

* private equity firms that in many cases straddled functioning, impressive companies -- or the private equity firm itself -- with needless debt following a deal to take a company or series of companies private.

*inappropriate, risky acquisitions by corporations -- often for companies well outside the acquiring company's mission.

* establishing credit card divisions in non-financial companies. General Electric (NYSE: GE) establishing a capital wing, is a classic example, Felson said. "Really, what business does an industrial giant like GE have starting a credit card business?" Felson said. "It makes no sense. But, in an era where 'everyone else is doing it' and 'there's money to be made,' all of a sudden, you're a credit card company. Pure idiocy. GE's now paying the price for that reckless move into consumer debt."

* and of course, exotic, problematic mortgages tied to Frankenstein-like mortgage backed securities that are hard to analyze and harder to price.

Analysis: Why did the reckless lending occur? Felson argues a combination of bank deregulation, market absolutism, rating agency operational failure, technology that enabled complex derivative instruments, and large increases in wealth among upper income groups, all contributed to the fee-driven leverage excesses.

How will the problem be solved? The good news is that the healing is underway, Felson said, with the next key data point being the U.S. Treasury's plan to remove toxic assets from the banking system and recapitalize banks and/or create new banks. Felson added that there's a 10-20% chance the U.S. Government will nationalize key banks, at least temporarily. Simultaneously, Congress, the Treasury and the Fed will spend the next year revising financial service regulations.